On 11/1/2020, an American firm purchased an inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 2/1/2020. Also on 11/1/2020, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 2/1/2020. The exchange rates were as follows:                                           Spot                             Forward  11/1/2020                    1 CD = $0.73              1 CD = $0.74 12/31/2020                  1 CD = $0.75              1 CD = $0.76 2/1/2021                      1 CD = $0.79              1 CD = $0.79 The American firm's fiscal year-end is 12/31. The changes in the value of the forward contract should be discounted at 12%. 1. What is the beginning balance (as of 1/1/2021) of accounts payable to the Canadian firm? a. 79,000 b. 75,000 c. 0 d. 73,000   2. What is the balance on the settlement date (2/1/2021) of inventory purchased from the Canadian firm? a. 73,000 b. 75,000 c. 0 d. 79,000   3. How much is the total income effect of the foreign transaction (purchase of inventory) with the forward contract? a. 6,000 loss b. 1,000 loss c. 2,000 gain d. 5,000 gain

Financial Accounting Intro Concepts Meth/Uses
14th Edition
ISBN:9781285595047
Author:Weil
Publisher:Weil
Chapter13: Marketable Securities And Derivatives
Section: Chapter Questions
Problem 21E
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On 11/1/2020, an American firm purchased an inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 2/1/2020. Also on 11/1/2020, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 2/1/2020. The exchange rates were as follows:

                                          Spot                             Forward 

11/1/2020                    1 CD = $0.73              1 CD = $0.74

12/31/2020                  1 CD = $0.75              1 CD = $0.76

2/1/2021                      1 CD = $0.79              1 CD = $0.79

The American firm's fiscal year-end is 12/31. The changes in the value of the forward contract should be discounted at 12%.

1. What is the beginning balance (as of 1/1/2021) of accounts payable to the Canadian firm?

a. 79,000

b. 75,000

c. 0
d. 73,000
 
2. What is the balance on the settlement date (2/1/2021) of inventory purchased from the Canadian firm?
a. 73,000
b. 75,000
c. 0
d. 79,000
 
3. How much is the total income effect of the foreign transaction (purchase of inventory) with the forward contract?
a. 6,000 loss
b. 1,000 loss
c. 2,000 gain
d. 5,000 gain
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